Informist, Wednesday, May 18, 2022

By Sayantan Sarkar

MUMBAI – The share of India’s crude oil imports from Russia has risen to nearly 5% of its total crude import basket in April from 1% in March. While the rise is not surprising as India has been filling up its stock with some extra oil barrels from Moscow at discounted rates, the gains would hardly be enough to drive home any definitive advantage considering the logistical challenges and other risks. 

Economic sanctions by the West and a proposal to phase out Russian energy imports by the European Union following the invasion of Ukraine have presented India with a rare opportunity to fill up the barrels at attractive discounts. 

India is the third-largest importer of crude and the offer of Russia, the country’s long time defence equipment supplier, to sell oil at a discount was too good to be ignored, especially at a time when a surge in global crude oil prices posed a serious challenge to economic growth.

Russia is one of world's leading producers of crude oil and has been looking for newer markets to make up for losses from Europe. Last month, it offered India crude oil at a discount of $35 per barrel to the pre-war price of around $95 per bbl. After the Russian invasion of Ukraine in February, global crude prices shot up to nearly $140 a bbl.

India will keep buying Russian oil as much as it can in the next few weeks while the discounts are in place, said Madhavi Mehta, a senior research analyst at Kotak Securities

LOGISTICAL CHALLENGES

Ramping up oil supply from Russia will be easier said than done. For one, logistical challenges involved in shipping oil from Russia appear simpler than what they are. 

"Russia will try to redirect as much volume as possible from the West to the East, but this effort will be limited by infrastructure constraints," said Rystad Energy's head of oil market research, Bjrnar Tonhaugen in an emailed commentary.

There are only two pipelines for oil to travel from Russia to Asia. These are a transit link through Kazakhstan and the Eastern Siberia-Pacific Ocean oil pipeline that have only 300,000 bpd of spare capacity.

"Some volumes may be moved by sea, but this will become continuously challenging as tankers that carry Russian crude face insurance issues, sanctions, and in some case even seizure," Rystad Energy's Tonhaugen said.

WORTH THE EFFORT?

Would the entire effort of buying crude oil at a discount be worth the cost? India procures defence-related equipment from Russia and both the countries had been a long time trade partners. But share of crude oil comprised very small part the trade relationship.

In April, the share of Russian crude oil imports in the Indian basket rose to 5%, according to S&P Global Market Intelligence's data. Of the total oil import of 4.8 mln bpd in April, India bought over 600,000 bpd of oil from Russia, higher than 300,000 bpd in the previous month.

"Unless the quantum of imports from Russia goes up significantly, it will not have much effect on India's import bill," said Upasna Bhardwaj, a senior economist at Kotak Mahindra Bank.

India spent over $120 bln on crude imports in 2021-22 (Apr-Mar), nearly double from $62.2 bln in the previous year, according to the Petroleum Planning and Analysis Cell. The country had spent nearly $15 bln alone in March when global oil prices touched over 14-year high.

The import figures are unlikely to come down anytime soon as global Brent crude prices remain elevated at around $115 per bbl on the benchmark Intercontinental Exchange.

Traditionally, India, which meets 85% of its oil requirements through imports, relied on West Asian crude grades from Saudi Arabia, Iraq and others. Russian imports constituted around 1% of India's imports for the whole of 2021 and the first quarter of this year.

"In our base case, we see Indian imports increasing by at least an additional 300,000 bpd and China by 200,000 bpd, but these incremental Russian cargoes can easily increase more through a reshuffling of spot purchases from elsewhere," Tonhaugen added.

But these numbers are still too small to have any meaningful impact on India's crude import bill. At a time when inflation in the country has risen to an eight-year-high last month, rising fuel prices have had a ripple effect on India's food, transportation and other sectors.

THE RUSSIAN SIDE

According to Commerzbank AG's estimates, Russia's exports to the European Union last month were 535,000 bbl lower than the average in January and February. On an average, the European Union imported 3.5-4.0 mln bpd oil from Russia.

"However, thanks to increased exports to India, Russia actually exported 620,000 more barrels of oil per day in April than the January/February average," said Barbara Lambrecht, energy analyst at Commerzbank, in a report.

The realisation, however, from increased imports is likely to be lower. "At least Russia’s export revenues are estimated to have declined month-on-month (in April) because of the high discounts it has been granting," Lambrecht added.

Earlier this month, European Commission President Ursula von der Leyen had proposed phasing out Russian crude imports within six months and refined products imports by the end of 2022. The draft is yet to be approved as countries such as Hungary and Slovakia are reluctant to back it, primarily because of their over-reliance on the Russian oil.

If the EU ban materialises, there could be a disruption of as much as 3 mln barrels of oil per day from Russia, and Europe has very few options to fill up the lost barrels.

So far, only the US, Canada, and the UK have implemented ban on Russian crude imports. However, these countries were importing a very small amount from Moscow earlier.

The challenges involved in importing Russian oil are unlikely to provide much space to India to scale up imports significantly, but may offer some breathing space in the face of high global crude oil prices.  End

US$1 = 77.58 rupees

Edited by Akul Nishant Akhoury

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